Back when the results of the EU membership referendum come through, and we woke up to the shock result (to me, at least) that the great British public had voted (just) to leave the European Union, it was immediately obvious the UK’s banking sector had been thrust into great danger.
Our departure was sure to bring an end to London’s predominant position at the centre of the continent’s banking system. And, in the time since, the big questions have been how hard will our banks be hit and what can they do to minimise the damage?
The answer to the second question, at least as far as Lloyds Banking Group (LSE: LLOY) goes, has been to turn away from international banking and refocus on the banking system within the UK. I think Lloyds has done a good job of turning itself in that direction. But its efforts could still be undone if we end up leaving the Union with no departure deal — which I think would be a disaster.
I can actually see UK shares in general suffering a further downturn in that scenario. I really think avoiding a no-deal Brexit should be our absolute number one priority right now — and hopefully without our ditches getting clogged with dead prime ministers.
But the banks will almost certainly suffer the most, in my view, as I see a severe recession as unavoidable without a departure deal. If that happens, fewer people will be wanting mortgages, fewer businesses will be wanting loans, and we’d surely see a decline in financial services in general.
Looking at the Lloyds share price, I think the markets agree with this line of thinking too. When it seemed Boris Johnson’s ‘leave, deal or no deal, no compromise’ approach was going to win the day, Lloyds shares were dumped and the price dipped to its lowest level since early 2013. But since parliament has reasserted its authority, the Lloyds price has ticked back up a little.
Business as usual
But what does Lloyds think and how is it dealing with the potential problem? Well, it seems as if it’s making the most of the tough economic times afflicting other operators in the financial field.
Remember what Warren Buffett said about being “greedy when others are fearful“? Well, Tesco is selling off its mortgage book as a result of “challenging market conditions,” and Lloyds is buying it. Even with an expected 2.5% premium to book value, Lloyds clearly sees long-term value in the £3.8bn deal, as the historic mortgage terms are still profitable.
In the short term, the final PPI cost to Lloyds of probably around £22bn has forced it to suspend its share buyback programme, and some are suggesting there’ll also be pressure on the dividend. I don’t see that myself, and I’m expecting to carry on getting my 6% annual yield.
But I do agree with those who think there could be more short-term share price volatility for Lloyds and, if I didn’t already own some shares, I’d probably wait until we see the final shape of our Brexit deal. But for the long term, I still think Lloyds shares are cheap.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.